With Karrot, Kabbage Digs Into Lending Club’s And Prosper’s Consumer Loans Business

Kabbage, the Atlanta-based startup that has raised hundreds of millions of dollars to build and run a money lending platform for small, online businesses, is turning over a new leaf, so to speak: today it is launching a new lending service called Karrot — its first product for consumers, is initially launching in the U.S. only.

Karrot has grown (sorry) out of what CEO and co-founder Rob Frohwein describes as something of a natural opportunity. “When we started targeting small businesses seven years ago, we end up attracting consumers, too. What we realised was that we were turning away one-third of the folks coming to us,” he says. He describes this as “a perfect segment” for Kabbage to tackle.

Karrot Personal Loans will be going head to head with a number of other players like Lending Club and Prosper in the online loans space that have up to now only been competitors in name, if not in fact.

Karrot will lend consumers up to $35,000 with repayment terms of either 36 or 60 months, at rates starting at 6.44% (as a point of comparison credit card companies’ rates are around 21%). Karrot says that it will turn loan applications into approvals “in minutes,” with payments coming as soon as the next day.

Frohwein says Karrot’s speed is partly because it has been built on the same platform as Kabbage — a big-data-fuelled analytics platform. For Kabbage’s SMB business, the platform uses and crunches through different data sources like accounting spreadsheets but also Facebook to determine a business’ ability to repay, and the optimal time when it would.

Karrot is a little different, Frohwein points out, in that it doesn’t tap quite so many sources of information — partly because data protection laws prevent this, and partly because the information is less relevant.

Karrot will be able to verify cashflow and income by synching up with your checking account, which happens in the background while you are completing the rest of your application.

Where social media access will come into play is that it will be used as part of the method for verifying a user’s identity (this sounds similar to the kinds of services that have been build by ID management companies like Trustev).

Frohwein says that Kabbage’s decision to add consumer loans was helped also by the partnerships its forged. In its early years, the loans were actually merchant cash advances that were not linked up with bank transactions. That changed last year when Kabbage started to work with Celtic Bank to provide a bank line of credit. This subsequently opened the door to the company being able to consider consumers as customers, since “Celtic can provide consumer loans,” he says.

Guggenheim Securities provided Kabbage with a $270 million credit facility earlier this year to lend out to small businesses — “we are heavily into that” right now, he says. But Karrot is not coming from the same fund. There are three others backing it, he says; Kabbage is not yet revealing the credit providers’ names. It doesn’t sound like fundraising has been a challenge for the company so far.

With Karrot now rolling, what’s next for Kabbage?

“Right now we’re focused on providing financing but we will look at other things,” Frohwein says. He points out that the amount of competition in the area of lending may be the lever to push him into other areas. “I like to joke that the girl scouts will soon start an online lending service.”

More seriously, he thinks that this will necessitate other actions, like mergers or acquisitions. “The real magic in this business is figuring out not how to lend money but how to make sure you get repaid,” he says. “Ultimately, there will be a lot of consolidation of companies that haven’t figured out how to do that.” Kabbage